Index dips as banks and miners lose ground

IT WAS another down day on the sharemarket yesterday, though losses were much less than Monday's near 1 per cent on the benchmark index.

By InvestSMART · 29 Feb 2012

By InvestSMART ·
29 Feb 2012

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IT WAS another down day on the sharemarket yesterday, though losses were much less than Monday's near 1 per cent on the benchmark index.

The S&P/ASX 200 Index shed 4.7 points, or 0.1 per cent, to 4262.7.

CommSec market analyst Steve Daghlian said the market had little to work with after a weak lead from US markets overnight.

The German parliament overwhelmingly approved

a second loan package for Greece, but that was expected, Mr Daghlian said.

Mining and financial stocks, which represent about 60 per cent of the Australian market, were lower. ANZ was the weakest of the big four banks, losing 20?, or 0.9 per cent, to $21.88. NAB fell 20?, to $21.88, Commonwealth 29? to $49.15 and Westpac 3? to $20.68.

Telstra rose 4?, or 1.2 per cent, to $3.27 after the competition watchdog approved plans to split the company in two.

BHP Billiton was 7? softer at $35.75 while Rio Tinto gained 30? to $67.70.

This reporting season has seen "cyclical" stocks those that rise and fall with economic growth significantly re-rated to represent the pick-up in domestic economic activity.

As financial house Goldman Sachs points out, large-cap industrials with exposure to domestic conditions are up about

18 per cent since January 1, outperforming defensive stocks by 15 per cent.

That has given some of the retailers cause to cheer, with the industry enjoying a rally this month, due largely to the cyclical bounce over summer, the chance of rate cuts and the prospect of further mergers and acquisitions (such as Billabong).

Over the past seven weeks, retailers Harvey Norman (up 12.2 per cent), Myer (up 16 per cent) and the Reject Shop (up 14.5 per cent) have risen substantially.

And Kathmandu, the hiking and outdoors retailer, has had its second-best monthly rise since it listed on the ASX in November 2009. The company, up 18.9 per cent since February 1, has clawed back some of the losses from the preceding three months.

After Kathmandu issued its last profit warning, in December 2010, its shares bottomed out at $1.20. Yesterday they closed at $1.51.

Still, fund managers warn the rally needs to be put into context.

"The whole sector is coming off a very low base," said ATI Asset Management's head of research, David Liu. "Over the six or 12 months leading up to February, it's one of the worst-performed sectors in the market."

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Frequently Asked Questions about this Article…

What happened to the S&P/ASX 200 index yesterday and why did the ASX200 dip?

The S&P/ASX 200 fell modestly, dropping about 4.7 points (roughly 0.1%) to 4,262.7. Market analysts said the ASX200 dipped after a weak lead from US markets overnight and mixed international news — including an expected German parliamentary vote on a second loan package for Greece — left local investors with little fresh positive catalyst.

Why did banks and miners lose ground on the sharemarket today?

Mining and financial stocks, which make up around 60% of the Australian market, were generally lower, dragging the index down. Among banks the big four all fell, with ANZ the weakest; in mining, BHP Billiton was softer while Rio Tinto managed gains, illustrating that the sector movement wasn’t uniform.

How did the big four banks perform and what were the notable bank price moves?

The big four banks slipped overall, with ANZ the weakest — down about 0.9% to $21.88. Commonwealth Bank and Westpac also fell (Commonwealth around $49.15 and Westpac around $20.68). The broad weakness in financial stocks contributed to the market decline.

Why did Telstra shares rise and what does the planned split mean for investors?

Telstra rose about 1.2% to $3.27 after the competition watchdog approved plans to split the company into two parts. For investors, the approved split was seen positively in the short term, lifting the share price as the corporate restructure progressed.

Which retail stocks have been rallying and what's driving the retail stocks rally?

Several retailers have enjoyed a strong run: over the past seven weeks Harvey Norman was up about 12.2%, Myer about 16%, and The Reject Shop about 14.5%. Kathmandu has also rebounded — up roughly 18.9% since February 1 — driven by a cyclical bounce over summer, the prospect of interest rate cuts, and talks of mergers and acquisitions in the sector.

What did Goldman Sachs say about cyclical stocks and how have they performed this year?

Goldman Sachs noted that large-cap industrials with exposure to domestic conditions have been re-rated and are up about 18% since January 1, outperforming defensive stocks by roughly 15%. This highlights a rotation into cyclical names tied to a pickup in domestic economic activity.

Should investors be cautious about the recent rally in cyclical and retail stocks?

Yes — fund managers warn the rally needs context. ATI Asset Management’s head of research, David Liu, pointed out that the whole sector was coming off a very low base and had been one of the worst-performing sectors in the six to 12 months leading up to February, so recent gains can partly reflect recovery from depressed levels.

How should everyday investors interpret this reporting season and recent market movements?

This reporting season has seen cyclical stocks re-rated to reflect a domestic economic pick-up, while mining and financials remain volatile. Everyday investors should note the sector rotation (industrial outperformance versus defensive stocks), the mixed results among individual miners and banks, and fund managers’ reminders to put rallies into historical context before making portfolio changes.